Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Private moneylenders to benefit from tightened lending rules
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By Lee Min-hyung
By Lee Min-hyung
With the financial watchdog tightening lending rules, private moneylenders are set to become the biggest beneficiaries despite concerns that low-income households will end up falling victim to the regulation, industry officials said Thursday.
The Financial Services Commission (FSC) plans to introduce a tighter set of lending restrictions by reinforcing rules on the debt service ratio (DSR). Starting Jan. 1, 2022, borrowers cannot take out loans surpassing more than 50 percent of their annual incomes from non-banking financial institutions, such as insurers and capital or card firms.
This is a decrease of 10 percent from the existing DSR regulation. The watchdog considered the step inevitable to control the surging household debt here.
But the tightened lending rule is expected to drive borrowers, especially ones in the lower-income bracket, into a corner. As banks and non-banking financial institutions have no choice but to follow the regulation, borrowers will have to turn to illegal private moneylenders if they need loans.
The problem is that some people may have to borrow money at much higher interest rates than what's offered on the market, according to analysts and industry insiders.
“It still remains questionable whether the latest regulatory step, aimed at stabilizing the overheated housing market, will take effect in Seoul and its surrounding areas amid a supply-demand imbalance in the local housing market,” an industry official said.
The lending restriction is expected to lead to a series of side effects, while low-income households, with nowhere else to go but private moneylenders, will inevitably fall victim to the regulation, according to the official.
Pandemic-related uncertainty also comes as a financial burden to small business owners.
“Even if the government provides some financial support for them, this is not enough for their survival and they have to continue borrowing money until the economy gets back on track for a recovery and domestic consumption is fully revitalized.”
The Bank of Korea's (BOK) planned key rate hike in November will also weigh on people from all walks of life. The central bank raised the rate by 25 basis points in August. The interest-related financial burden has already started to affect borrowers who took out tens of millions of won or more in loans, said bank industry officials.
But this is just the beginning, they said, because in tandem with the planned gradual tightening by the U.S. Federal Reserve (Fed), the BOK will keep increasing the benchmark rate at least once more, possibly in the first half of next year.
“The people will have no choice but to reduce their spending to bear the increase in financial costs next year, and this may slow down the pace of economic recovery, particularly in terms of domestic consumption,” the official said.